Pangrace and Lapine on the Consumer Credit Card Account Practices Rules


In January 2009, the Federal Reserve Board, the OTS (Office of Thrift Supervision), and the NCUA (National Credit Union Administration) adopted the Consumer Credit Card Account Practices Rules designed to protect consumers who use credit cards from unfair acts and practices. In this Commentary, Nathan Pangrace and Ken Lapine explain each of the five new rules, effective July 2010, that apply to financial institutions and speculate on the likely effect of the new regulations on the credit markets and the American economy in general. They write:
 
     The first rule requires that a credit card issuer not treat a payment on a consumer credit card account as late unless the issuer has provided the consumer with a reasonable amount of time to make the payment. Treating a payment as late includes increasing the APR as a penalty, reporting the consumer as delinquent to a credit reporting agency, or assessing a late fee on the consumer’s failure to make a payment within the amount of time provided. Under a safe harbor provision, an issuer provides a reasonable amount of time to make a payment if it has adopted procedures ensuring that periodic statements specifying the payment due date are mailed or delivered to consumers at least 21 days before the payment due date. This late payment rule does not apply to a grace period provided by the issuer during which the consumer may make repayments on the account balance without incurring finance charges.
 
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     The fourth rule prohibits a credit card issuer from computing finance charges on consumer credit card accounts using the two-cycle billing method. Formerly, an issuer could use the two-cycle method in connection with a grace period, whereby the issuer refrained from assessing finance charges until it knew whether or not the consumer would pay the account balance in full by the payment due date. If the consumer paid in full, then the issuer would honor the grace period. Otherwise, the issuer would assess finance charges from the transaction date, thus capturing the charges from the preceding billing cycle that it refrained from assessing under the grace period. However, under the new rule, an issuer may not assess finance charges based on balances for days in billing cycles that precede the most recent billing cycle as the result of the loss of a grace period.
 
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     The potential effect that the Credit Card Account Practices Rules will have on an American economy deeply wounded by world-wide recession remains unclear. It is possible the new rules may help restore consumer confidence and accelerate our recovery. Indeed, the new regulations are the most sweeping reforms of the credit card industry in the last several decades. They allow consumers to access credit on terms that are more fair, easily comprehensible, and transparent. As a result, the rules may increase competition and empower consumers to avoid unnecessary costs and better manage their credit. The rules might also increase public confidence in financial institutions and establish a level playing field for institutions that want to do business fairly without suffering competitive disadvantages. Furthermore, these new protections to cardholders come at an essential time. Many families are crushed with unprecedented levels of debt and are falling behind on their loan payments.
 

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